Should You Invest in Lower-End Markets?

 

It is a topic that affects every investor as they get into the market and start buying houses.

Should I buy houses in lower-end neighborhoods?

This is a loaded question that is wrought with tough decisions and challenges — and the answer is different for every investor based upon the make-up of the portfolio and decision.

Why should I invest in lower-end homes?

There are a lot of things that make investing in lower-end real estate look like an amazing opportunity.

  • Low Purchase Price – who doesn’t love the idea of buying five houses for what you’d normally pay for one?
  • High Rate of Returns – Going hand-in-hand with purchase price is the return rate. When you purchase a property for cheaper it becomes a lot easier to have a return that’s positive
  • Inventory – depending on your options the inventory is there and unlike the higher-end markets you aren’t competing against home buyers that like to bid up prices on your prime investments.

Why I shouldn’t invest in lower-end homes?

While the number of reasons to invest is there, it is also a wide collection of investors that will not invest in lower-end inventory.

  • Increased Cost to Get Rental Ready – purchase at $25,000 but it needs $20,000 in rehab costs to be a nice rental. So the cost is really $45,000 and if you’re looking at 20% return then your monthly required return just went up $200 per month.
  • location, Location, Location – Central Ohio as never been known for its strong growth price wise, and the lower end developments will continue to be sluggish at best.

Regardless – Never become a slumlord!

BiggerPockets.com defines a slumlord as “a derogatory term for landlords, generally absentee landlords, who attempt to exploit tenants and maximize profits by refusing to spend on property maintenance, often in deteriorating neighborhoods” in a recent article “Are you a ‘slumlord’?”.

Vacant Home, Delaware, Ohio

Purchasing homes in lower-end neighborhoods are tempting for investors. But if not done right the purchase can cause just as much issues as a higher-priced one. (photo by B.Cleary / stock.xchng)

The issue with a slumlord is very basic … They are hurting the system and essentially biting the hand that feeds them.

Don’t believe me? Who is paying your mortgage or giving you that great return on your investment? That’s right … The renters. So when you let the quality of your property drop, your quality of tenant drops and the amount you can charge for rent drops. The only thing that rises is your administrative costs as you keep kicking tenants out.

Should I Invest in Low-End Housing or Not?

The answer is a definitive … that depends. The key to being a good real-estate investor is sticking to your plan and doing what you do best. Hence when it comes to investing in properties that are not in prime markets – you need to do a full analysis and make sure it is within your wheel house and that you are prepared and equipped to make it a success.

All information on this site is deemed reliable and accurate as of date of posting but is not guaranteed. Information provided on this site is not to be used to make a final decision please contact your tax professional, attorney, inspector, or REALTOR for your specific situations.